Mental Warm Up - Dingbats  R E A D I N G Reading Between the Lines  OHOLENE Hole in One  Sailing ccccccc ccccccc Sailing on the 7 Seas

Today’s Lesson Objectives By the end of this morning’s lesson you will:  Understand what the term depreciation means  Understand where and how depreciation is recorded in the financial reports  Begin to understand how to calculate Straight Line Depreciation.

Depreciation – the definition…  The reduction in value of a fixed asset over its useful life

Explanation of Depreciation When you buy a new car or computer it loses value the minute it leaves the shop. Why?

Why Assets Depreciate in Value  Technology moves on  Time  Wear and Tear

Why is this Important for Financial Accounts?  The Balance Sheet has to show an accurate value of the assets on the day it is prepared.  Depreciation is a business expense (i.e. they are losing money) which must be deducted in order to show accurate levels of profit. Whereabouts on the Balance Sheet & Profit & Loss Account do you think it is recorded?

Balance Sheets £££ Cost Depreciation to date Net Book Value Fixed Assets Land & Buildings 250, ,000 Machinery120,00060,00060,000 Motor Vehicles 50,00030,00020,000

Profit & Loss Accounts ££ SalesX Less Cost of Sales (X) Gross Profit X, Less Expenses DepreciationX Other expenses X Total Expenses (X) Net Profit X or (X)

Annual Depreciation Charge The Straight Line Method Cost of the Asset – Residual Value of the Asset Useful Life (years) What you paid for it What it’s going to be worth when you’ve finished with it How long you intend to keep it for

Straight Line Depreciation Example When Matty bought his car it cost him £1,500. He intends to keep it for 5 years, at which point he expects to sell it for £200. What is Matty’s annual depreciation charge?

Answer £1,500 - £200 5 years = £260 per year. = £260 per year. We can put this straight into the expenses section of our P&L Account

And for the Balance Sheet? Year Annual Dep’n Charge Cost Dep’n to Date NBV

What have you learned? By the end of this morning’s lesson you will:  Understand what the term depreciation means  Understand where and how depreciation is recorded in the financial reports  Begin to understand how to calculate Straight Line Depreciation.

Mental Warm Up - Dingbats DDDWESTDDD M CE ORCLOCKC K West Indies 3 Blind Mice – they have no i’s !! Rock around the Clock

What we will learn now… By the end of this lesson you will:  Be comfortable using the Straight Line Method of Depreciation  Understand why we use the Reducing Balance Method of Depreciation  Begin to be able to calculate depreciation using the Reducing Balance Method

Recap  What is Depreciation?  Where do we record it in the financial accounts?  What is the formula for the Straight Line method of Depreciation?

Straight Line Depreciation Practice Nav bought a new top-of-the range computer for his architecture business for £3,500. He expects to change it in 4 years and sell it on for £300. What is Nav’s annual depreciation charge? Illustrate how it would depreciate in value over each year of it’s useful life.

Answer £3,500 - £300 4 years = £800 per year. = £800 per year. We can put this straight into the expenses section of our P&L Account

Why do we use the Reducing Balance Method?  Does a car depreciate in value equally over it’s lifetime? TIME VALUE

How the Reducing Balance Method Works A set PERCENTAGE is taken off the value of the asset every year it is owned.  Calculate Nav’s depreciation at 55% pa using this method

EXAMPLE Year Value Brought forward Depreciation charge (55%) Value carried forward 1£3, £1,925 £1,575 £866£709 £390£319

Have A Go…  Anjana bought a £25,000 Jaguar to impress clients of her new HR consultancy business. She decided to depreciate it at the rate of 40% every year. She intends to trade it in for a Porsche in 5 years time.  Calculate Anjana’s depreciation using the Reducing Balance Method. Was this a good figure to use?

AnswerYear Value Brought forward Depreciation charge (40%) Value carried forward 1£25, £10,000£15,000 £1,296 £6,000£9,000 £3,600£5,400 £2,160£3,240 £15,000 £1,944

What have we learned?  Be comfortable using the Straight Line Method of Depreciation  Understand why we use the Reducing Balance Method of Depreciation  Begin to be able to calculate depreciation using the Reducing Balance Method